Celsius Holdings, Inc. [CELH] Filings

10-Q 1 celh-20230930.htm 10-Q celh-20230930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-34611

CELSIUS HOLDINGS, INC.

(Exact name of registrant as specified in its charter)


Nevada						20-2745790
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)


2424 N Federal Highway, Suite 208, Boca Raton, Florida						33431
(Address of principal executive offices)						(Zip Code)

(561) 276-2239

(Registrant’s telephone number, including area code)

__________________________________________________________________

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock, $0.001 par value

CELH

Nasdaq Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:


Large accelerated filer	x	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	o
		Emerging growth company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of shares outstanding of the registrant’s common stock, $0.001 par value, as of October 31, 2023 was 77,225,007 shares.

TABLE OF CONTENTS


		Page

PART I – FINANCIAL INFORMATION		1

Item 1.	Financial Statements	1
	Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022 (unaudited)	1
	Consolidated Statements of Operatio ns and Comp rehensive Income (Loss) for th e three and nine months ended September 30, 2023 and 2022 (unaudited)	2
	Consolidated Statements of Changes in Stockholders’ Equity and Mezzanine Equity for the three and nine months ended September 30, 2023 (unaudited)	3
	Consolidated Statements of Changes in Stockholders’ Equity and Mezzanine Equity for the three and nine months ended September 30, 2022 (unaudited)	4
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022 (unaudited)	5
	Notes to Consolidated Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33

Item 4.	Controls and Procedures	33

PART II – OTHER INFORMATION		34

Item 1.	Legal Proceedings	34

Item 1A.	Risk Factors	34

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34

Item 3.	Defaults Upon Senior Securities	34

Item 4.	Mine Safety Disclosures	34

Item 5.	Other Information	35

Item 6.	Exhibits	35

SIGNATURES		36

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

Celsius Holdings, Inc.

Consolidated Balance Sheets

(In thousands, except par value and share amounts) (Unaudited)


	September 30, 2023		December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	760,022	$	614,159
Restricted cash	—		38,768
Accounts receivable-net	215,243		63,311
Note receivable-current-net	3,309		2,979
Inventories-net	198,704		173,289
Prepaid expenses and other current assets	23,747		11,341
Deferred other costs-current	14,124		14,124
Total current assets	1,215,149		917,971

Note receivable-non-current	—		3,574
Property and equipment-net	21,061		10,185
Deferred tax assets	30,614		501
Right of use assets-operating leases	1,152		972
Right of use assets-finance leases	148		208
Other long-term assets	265		263
Deferred other costs-non-current	251,869		262,462
Intangibles-net	11,772		12,254
Goodwill	13,588		13,679
Total Assets	$	1,545,618	$	1,222,069

LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	121,088	$	106,147
Income taxes payable	58,855		1,193
Accrued distributor termination fees	—		3,986
Accrued promotional allowance	136,557		35,977
Lease liability obligation-operating leases	628		661
Lease liability obligation-finance leases	63		70
Deferred revenue-current	9,500		9,675
Other current liabilities	8,826		3,586
Total current liabilities	335,517		161,295

Long-term liabilities:
Lease liability obligation-operating leases	512		326
Lease liability obligation-finance leases	135		162
Deferred tax liability	2,249		15,919
Deferred revenue-non-current	169,370		179,788
Total Liabilities	507,783		357,490

Commitments and contingencies (Note 19)

Mezzanine Equity:
Series A convertible preferred shares, $0.001 par value, 5% cumulative dividends; 1,466,666 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively, aggregate liquidation preference of $550,000 as of September 30, 2023 and December 31, 2022, respectively	824,488		824,488

Stockholders’ Equity:
Common stock, $0.001 par value; 100,000,000 shares authorized, 77,225,007 and 76,382,441 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively	77		76
Additional paid-in capital	277,980		280,668
Accumulated other comprehensive loss	(2,541)		(1,881)
Accumulated deficit	(62,169)		(238,772)
Total Stockholders’ Equity	213,347		40,091
Total Liabilities, Mezzanine Equity and Stockholders’ Equity	$	1,545,618	$	1,222,069

The accompanying notes are an integral part of these unaudited consolidated financial statements

Celsius Holdings, Inc.

Consolidated Statements of Operations and Comprehensive Income (Loss)

(In thousands, except per share amounts)

(Unaudited)


	For The Three Months Ended September 30,				For The Nine Months Ended September 30,
	2023		2022		2023		2022
Revenue	$	384,757	$	188,233	$	970,579	$	475,640
Cost of revenue	190,675		109,583		503,685		283,778
Gross profit	194,082		78,650		466,894		191,862
Selling, general and administrative expenses	96,385		226,249		259,471		316,917

Income (loss) from operations	97,697		(147,599)		207,423		(125,055)

Other income (expense):

Interest income on note receivable	28		53		101		186
Interest income, net	7,197		1,396		17,666		1,393
Foreign exchange loss	(177)		(254)		(1,226)		(930)
Total other income	7,048		1,195		16,541		649

Net income (loss) before income taxes	104,745		(146,404)		223,964		(124,406)

Income tax expense	(20,796)		(35,492)		(47,279)		(41,653)

Net income (loss)	$	83,949	$	(181,896)	$	176,685	$	(166,059)

Dividends on Series A convertible preferred shares	(6,875)		(4,596)		(20,512)		(4,596)
Income allocated to participating preferred shares	(6,540)		—		(13,263)		—
Net income (loss) attributable to common stockholders	$	70,534	$	(186,492)	$	142,910	$	(170,655)

Other comprehensive income (loss):
Foreign currency translation loss, net of income tax	(664)		(2,038)		(660)		(4,813)
Comprehensive income (loss)	$	69,870	$	(188,530)	$	142,250	$	(175,468)

Earnings per share:
Basic	$	0.92	$	(2.46)	$	1.86	$	(2.26)
Diluted	$	0.89	$	(2.46)	$	1.81	$	(2.26)
Weighted average shares outstanding:
Basic	77,002		75,796		76,841		75,625
Diluted	79,091		75,796		78,962		75,625

The accompanying notes are an integral part of these unaudited consolidated financial statements

Celsius Holdings, Inc.

Consolidated Statements of Changes in Stockholders’ Equity and Mezzanine Equity

(In thousands)

(Unaudited)


	Stockholders' Equity
	Common Stock											Mezzanine Equity
	Shares	Amount		Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders' Equity		Preferred Shares	Amount
Balance at December 31, 2022	76,382	$	76	$	280,668	$	(1,881)	$	(238,772)	$	40,091	1,467	$	824,488
Adoption of accounting standard	—	—		—		—		(82)		(82)		—	—
Stock-based compensation expense	—	—		5,507		—		—		5,507		—	—
Issuance of common stock pursuant to exercise of stock options and vested restricted stock units - Cashless	251	1		—		—		—		1		—	—
Issuance of common stock pursuant to exercise of stock options - Cash	149	—		478		—		—		478		—	—
Dividends paid to Series A convertible preferred shares	—	—		(6,781)				—		(6,781)		—
Foreign currency translation	—	—		—		594		—		594		—	—
Net income	—	—		—		—		41,227		41,227		—	—
Balance at March 31, 2023	76,782	$	77	$	279,872	$	(1,287)	$	(197,627)	$	81,035	1,467	$	824,488
Stock-based compensation expense	—	—		5,735		—		—		5,735		—	—
Issuance of common stock pursuant to exercise of stock options and vested restricted stock units - Cashless	63	—		—		—		—		—		—	—
Issuance of common stock pursuant to exercise of stock options - Cash	39	—		229		—		—		229		—	—
Dividends paid to Series A convertible preferred shares	—	—		(6,856)		—		—		(6,856)		—	—
Foreign currency translation	—	—		—		(590)		—		(590)		—	—
Net income	—	—		—		—		51,509		51,509		—	—
Balance at June 30, 2023	76,884	$	77	$	278,980	$	(1,877)	$	(146,118)	$	131,062	1,467	$	824,488
Stock-based compensation expense	—	—		4,979		—		—		4,979		—	—
Issuance of common stock pursuant to exercise of stock options and vested restricted stock units - Cashless	47	—		—		—		—		—		—	—
Issuance of common stock pursuant to exercise of stock options - Cash	294	—		896		—		—		896		—	—
Dividends paid to Series A convertible preferred shares	—	—		(6,875)		—		—		(6,875)		—	—
Foreign currency translation	—	—		—		(664)		—		(664)		—	—
Net income	—	—		—		—		83,949		83,949		—	—
Balance at September 30, 2023	77,225	$	77	$	277,980	$	(2,541)	$	(62,169)	$	213,347	1,467	$	824,488

The accompanying notes are an integral part of these unaudited consolidated financial statements

Celsius Holdings, Inc.

Consolidated Statements of Changes in Stockholders’ Equity and Mezzanine Equity

(In thousands)

(Unaudited)


	Stockholders' Equity
	Common Stock											Mezzanine Equity
	Shares	Amount		Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total Stockholders' Equity		Preferred Shares	Amount
Balance at December 31, 2021	74,909	$	75	$	267,847	$	614	$	(51,490)	$	217,046	—	$	—
Stock-based compensation expense	—	—		4,310		—		—		4,310		—	—
Issuance of common stock pursuant to exercise of stock options - Cashless	248	—		—		—		—		—		—	—
Issuance of common stock pursuant to exercise of stock options - Cash	194	—		810		—		—		810		—	—
Foreign currency translation	—	—		—		(491)		—		(491)		—	—
Net income	—	—		—		—		6,679		6,679		—	—
Balance at March 31, 2022	75,351	$	75	$	272,967	$	123	$	(44,811)	$	228,354	—	$	—
Stock-based compensation expense	—	—		4,207		—		—		4,207		—	—
Issuance of common stock pursuant to exercise of stock options - Cashless	99	—		—		—		—		—		—	—
Issuance of common stock pursuant to exercise of stock options - Cash	172	1		449		—		—		450		—	—
Foreign currency translation	—	—		—		(2,296)		—		(2,296)		—	—
Net income	—	—		—		—		9,158		9,158		—	—
Balance at June 30, 2022	75,622	$	76	$	277,623	$	(2,173)	$	(35,653)	$	239,873	—	$	—
Stock-based compensation expense	—	—		6,263		—		—		6,263		—	—
Issuance of common stock pursuant to exercise of stock options - Cashless	58	—		—		—		—		—		—	—
Issuance of common stock pursuant to exercise of stock options - Cash	536	—		1,843		—		—		1,843		—	—
Issuance of Series A convertible preferred shares - net of issuance costs	—	—		—		—		—		—		1,467	824,488
Dividends paid to Series A convertible preferred shares	—	—		(4,596)		—		—		(4,596)		—	—
Foreign currency translation	—	—		—		(2,038)		—		(2,038)		—	—
Net income (loss)	—	—		—		—		(181,896)		(181,896)		—	—
Balance at September 30, 2022	76,216	$	76	$	281,133	$	(4,211)	$	(217,549)	$	59,449	1,467	$	824,488

The accompanying notes are an integral part of these unaudited consolidated financial statements

Celsius Holdings, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)


	For The Nine Months Ended September 30,
	2023		2022
Cash flows from operating activities:
Net income (loss)	$	176,685	$	(166,059)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation	1,676		952
Amortization	445		402
Impairment of intangible assets	—		2,379
Allowance for credit losses	1,880		705
Amortization of deferred other costs	10,593		2,354
Inventory excess and obsolescence	2,677		1,078
Loss on disposal of property and equipment	195		—
Stock-based compensation expense	16,221		14,780
Deferred income taxes-net	(44,303)		31,329
Foreign exchange loss	258		1,007
Changes in operating assets and liabilities:
Accounts receivable-net	(153,271)		(78,967)
Inventories-net	(28,092)		36,211
Prepaid expenses and other current assets	(12,406)		1,459
Accounts payable and accrued expenses	14,652		(3,050)
Income taxes payable	57,662		30,299
Accrued promotional allowance	100,580		24,213
Accrued distributor termination fees	(3,986)		115,551
Other current liabilities	5,239		2,291
Change in right of use and lease obligation-net	(64)		(126)
Deferred revenue	(10,593)		154,103

Other assets	(2)		56
Net cash provided by operating activities	136,046		170,967

Cash flows from investing activities:
Collections from note receivable	3,233		2,592
Purchase of property and equipment	(12,687)		(3,477)
Net cash (used in) investing activities	(9,454)		(885)

Cash flows from financing activities:
Principal payments on finance lease obligations	(33)		(49)
Proceeds from exercise of stock options	1,603		3,104
Proceeds from issuance of Series A preferred shares, net of issuance costs	—		542,018
Dividends paid on preferred shares	(20,512)		(4,596)
Net cash (used in) provided by financing activities	(18,942)		540,477
Effect of exchange rate changes on cash and cash equivalents	(555)		158
Net increase in cash and cash equivalents	107,095		710,717
Cash and cash equivalents at beginning of the period	652,927		16,255

Cash and cash equivalents at end of the period	$	760,022	$	726,972
Supplemental disclosures:
Cash paid for:
Taxes	$	33,049	$	591

The accompanying notes are an integral part of these unaudited consolidated financial statements

Celsius Holdings, Inc.

Notes to Consolidated Financial Statements (unaudited)

September 30, 2023

(Tabular dollars in thousands, except per share amounts)

1.ORGANIZATION AND DESCRIPTION OF BUSINESS

Business — Celsius Holdings, Inc. (the “Company,” “Celsius Holdings” or "Celsius") was incorporated under the laws of the State of Nevada on April 26, 2005. On January 24, 2007, the Company entered into a merger agreement and plan of reorganization with Elite FX, Inc., a Florida corporation, pursuant to which, on January 26, 2007, Elite FX, Inc. merged into the Company’s wholly-owned subsidiary, Celsius, Inc., which survived the merger.

The Company is engaged in the development, marketing, sale and distribution of “functional” calorie-burning energy drinks and liquid supplements under the Celsius® brand name.

On August 1, 2022, the Company and PepsiCo Inc. ("Pepsi"), entered into multiple agreements, including a Securities Purchase Agreement (“Purchase Agreement”), Lock-Up Agreements, a Registration Rights Agreement, a Distribution Agreement (“Distribution Agreement”), and a Channel Transition Agreement ("Transition Agreement"). The Purchase Agreement, Lock-Up Agreements and Registration Rights Agreement pertain to the Company’s issuance of approximately 1.5 million shares of the Company's Series A Convertible Preferred Stock (“Series A” or “Series A Convertible Preferred Stock”) in exchange for cash proceeds of $550 million, excluding transaction costs. The Transition Agreement specifies payments to be made by Pepsi to Celsius in exchange for Celsius transitioning certain existing distribution rights to Pepsi. The Distribution Agreement resulted in Pepsi becoming the Company’s primary distribution supplier for the Company's products in the United States. See Note 4. Revenue, Note 13. Related Party Transactions, and Note 14. Mezzanine Equity for more information.

In connection with the Distribution Agreement and Transition Agreement, the Company terminated supply agreements with existing suppliers to transition certain territory rights to Pepsi. These termination expenses were recognized by the Company upon delivery of termination notices to the other distributors, in accordance with ASC Topic 420 Exit or Disposal Cost Obligations. During the nine months ended September 30, 2023, the Company refunded to Pepsi the difference between projected termination payments to distributors and the related payments received from Pepsi, resulting in no refund liability due to Pepsi as of September 30, 2023. See Note 13. Related Party Transactions for more information.

2.BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation — The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the consolidated financial statements do not include all of the information and notes required by US GAAP for annual audited consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results expected for any future period or the full year. These unaudited consolidated financial statements have been prepared on a basis that is substantially consistent with the accounting principles applied in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022 and the Amendment No. 1 to the Annual Report on Form 10-K/A, as filed by the Company with the Securities and Exchange Commission (collectively the "2022 Annual Report"). These unaudited consolidated financial statements and the accompanying notes should be read in conjunction with the 2022 Annual Report. The consolidated financial statements of the Company include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.

Certain prior period amounts have been reclassified to conform with current period presentation in the consolidated financial statements and notes thereto. Accrued promotional allowance and income tax payable were reallocated from within Accounts payable and accrued expenses and are now reflected as standalone line items in the consolidated balance sheets and consolidated statements of cash flows, respectively.

Significant Estimates — The preparation of consolidated financial statements and accompanying disclosures in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and disclosure of contingent assets and liabilities at the date of the financial statements. Although these estimates are based on management's best knowledge of current events and actions that the Company may undertake in the future, actual results may differ from those estimates. Significant estimates include the allowance for current expected credit losses, allowance for inventory obsolescence and sales returns, the useful lives of property and equipment, impairment of goodwill and intangibles, deferred taxes and related valuation allowance, promotional allowance, and valuation of stock-based compensation.

Celsius Holdings, Inc.

Notes to Consolidated Financial Statements (unaudited)

September 30, 2023

(Tabular dollars in thousands, except per share amounts)

In 2023, the Company experienced significant growth and scaling of its business as a result of the Distribution Agreement with Pepsi discussed in Note 1. Organization and Description of Business. This growth is evident in the number of locations that product is available, the SKUs available per location, and improved placement within each location. The expansion of availability of the Company's products has improved the success rate of promotional activities. During the quarter ended September 30, 2023, the Company received updated information related to promotional activity during the first half of 2023, including final invoicing for the prior periods, and evaluated this data in conjunction with recent trends and activity which resulted in a change in the accounting estimate of the accrued promotional allowance for certain customers. This update resulted in a reduction to the accrual in the consolidated balance sheets and an increase to revenue in the consolidated statements of operations and comprehensive income (loss) for the current period. This increase was offset by various promotional-related adjustments from different customers, aside from the customers that triggered the change in estimate.

This change in accounting estimate increased net income by $9.5 million for the three months ended September 30, 2023. This translates to $0.11 per basic and diluted shares, respectively, for the three months ended September 30, 2023. The change in accounting estimate has been applied prospectively. Refer to Note 4. Revenue for more information on the promotional allowance.

Segment Reporting — Operating segments are defined as components of an enterprise that engage in business activities, maintain discrete financial information, and undergo regular review by the chief operating decision maker ("CODM"), who in this case, is the Chief Executive Officer. This review is performed to assess performance and allocate resources.

Despite the Company's presence in several geographical regions, it operates as a single entity. The Company's operations and strategies are centrally designed and executed due to the substantial similarities among the geographical components. The CODM evaluates operating results and allocates resources primarily on a consolidated basis due to the significant economic interdependencies between the Company's geographical operations. As a result, the Company reports as a single operating segment.

Concentrations of Risk — Substantially all of the Company’s revenue is derived from the sale of Celsius® functional energy drinks and liquid supplements.

Revenue from customers accounting for more than 10% of total revenue for the three and nine months ended September 30, 2023 and 2022 were as follows:


	For The Three Months Ended September 30,				For The Nine Months Ended September 30,
	2023		2022		2023		2022
Pepsi	64.6	%	31.2	%	60.8	%	12.4	%
Costco	8.9	%	12.9	%	11.4	%	15.1	%

All others	26.5	%	55.9	%	27.8	%	72.5	%
Total	100.0	%	100.0	%	100.0	%	100.0	%

Accounts receivable from customers accounting for more than 10% of total accounts receivable for the nine months ended September 30, 2023 and the year ended December 31, 2022 were as follows:


	2023		2022
Pepsi	73.2	%	47.6	%
Amazon	7.5	%	11.8	%
All others	19.3	%	40.6	%
Total	100.0	%	100.0	%

Financial instruments that potentially subject the Company to concentrations of credit risk primarily include cash and cash equivalents, accounts receivable and note receivable. The Company places its cash and cash equivalents with high-quality financial institutions. At times, balances in the Company’s cash accounts may exceed the Federal Deposit Insurance Corporation ("FDIC") limit. At September 30, 2023 and December 31, 2022, the Company had approximately $759.5 million and $652.4 million in excess of the FDIC limit.

Celsius Holdings, Inc.

Notes to Consolidated Financial Statements (unaudited)

September 30, 2023

(Tabular dollars in thousands, except per share amounts)

Cash Equivalents — The Company considers all highly liquid instruments with original maturities of three months or less when purchased to be cash equivalents. At September 30, 2023 and December 31, 2022, the Company did not have any investments with original maturities of three months or greater.

Restricted Cash — During 2022, the Company received upfront payments from Pepsi. These payments were contractually restricted to satisfy termination payments due to former distributors. Any unused payments were repaid to Pepsi during the nine months ended September 30, 2023. These upfront payments received from Pepsi could not be used for the Company's general operating activities and were classified as restricted cash based on the terms of the Transition Agreement. See Note 4. Revenue for more information. At September 30, 2023, the Company did not have any restricted cash. At December 31, 2022, the Company had $38.8 million of restricted cash.

Accounts Receivable and Current Expected Credit Losses — The Company is exposed to potential credit risks associated with its product sales and related accounts receivable, as it generally does not require collateral. The Company’s expected loss allowance methodology for accounts receivable is developed using historical collection experience, current and future economic and market conditions, a review of the current status of customers’ trade accounts receivables, and where available, a review of the financial strength and credit ratings of larger customers. Customers are pooled based on sharing specific risk factors and the Company reassesses these customer pools on a periodic basis. The receivables allowance is based on aging of the accounts receivable balances and forward-looking information. The Company uses the probability of default and forward-looking information to assess credit risk and estimate expected credit losses for its note receivable related to Qifeng Food Technology (Beijing) Co. Ltd ("Qifeng"). See Note 7. Note Receivable for more information on Qifeng and the note receivable.

The Company determines expected credit losses using information such as its customers' credit history, financial condition, industry, credit reports, and current and future economic and market conditions. Allowances can be affected by changes in the industry, customer credit issues or customer bankruptcies when such events are reasonable and supportable. Historical information is used in addition to reasonable and supportable forecast periods, where applicable.


	Allowance for Expected Credit Losses
Balance as of December 31, 2022	$	2,147
Current period change for expected credit losses	642
Balance as of September 30, 2023	$	2,789

Inventories — Inventories are valued at the lower of cost or net realizable value, with costs approximating those determined under the first-in, first-out method. At September 30, 2023 and December 31, 2022, there was an inventory allowance for excess and obsolete products of approximately $3.9 million and $8.4 million, respectively. Changes in the allowance are included in cost of revenue.

Property and Equipment — Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful life of the asset, generally ranging from three to seven years.

Impairment of Long-Lived Assets — In accordance with ASC Topic 360, Property, Plant, and Equipment the Company reviews the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is determined regarding a long-lived asset if its carrying amount is not recoverable and exceeds its fair value. The carrying amount is not recoverable when it exceeds the sum of the undiscounted cash flows expected to result from use of the asset over its remaining useful life and final disposition. The Company did not record any impairment charges during the nine months ended September 30, 2023. For the nine months ended September 30, 2022, the Company recorded an impairment charge related to the Func Foods brand name. Refer to Note 2. Basis of Presentation and Summary of Significant Accounting Policies - Intangible Assets and Note 10. Goodwill and Intangibles for more information.

Celsius Holdings, Inc.

Notes to Consolidated Financial Statements (unaudited)

September 30, 2023

(Tabular dollars in thousands, except per share amounts)

Long-Lived Asset Geographic Data — The following table sets forth long-lived asset information, which includes property and equipment-net, right-of-use assets, and definite-lived intangibles-net and excludes goodwill and indefinite-lived intangibles, where individual countries represent a significant portion of the total:


	September 30, 2023		December 31, 2022
United States	$	19,854	$	9,750

Finland	11,748		12,171
Sweden	2,058		1,251
Other	29		1
Long-lived assets related to foreign operations	13,835		13,423
Total long-lived assets-net	$	33,689	$	23,173

Goodwill — The Company records goodwill when the consideration paid for an acquisition exceeds the fair value of net tangible and intangible assets acquired, including related tax effects. Goodwill is not amortized; instead, goodwill is tested for impairment on an annual basis as of October 1st, or more frequently if the Company believes indicators of impairment exist. The Company first assesses qualitative factors such as macro-economic conditions, industry and market conditions, and cost factors as well as other relevant events, to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying value. If the Company determines that the fair value is less than the carrying value, the Company will recognize an impairment charge based on the excess of a reporting unit’s carrying value over its fair value. At September 30, 2023 and December 31, 2022, there were no indicators of goodwill impairment.

Intangible Assets — Intangible assets are comprised of customer relationships and brands acquired in a business combination. In accordance with ASC Topic 350, Intangibles - Goodwill, and Other, the Company amortizes intangible assets with a definitive life over their respective useful lives. The Company tests intangible long-lived assets for impairment when events suggest that the carrying amount may not be recoverable. The test involves comparing the asset's carrying amount to its estimated undiscounted future cash flows. If the carrying amount exceeds these cash flows, an impairment loss, equal to the difference between the carrying amount and the fair value, is recognized. Assets with indefinite lives are tested for impairment on an annual basis as of October 1st or more frequently if the Company believes that impairment indicators exist.

The addition of the Pepsi distribution network in the prior year shifted the Company's focus to the U.S. market, and as a result it was determined that impairment indicators for the Func Foods Brands indefinite intangible asset were present. The Company doesn't anticipate focusing on the expansion of Func Food branded products and the Company plans to focus on Celsius branded products. As a result of the strategic shift, which the Company considered a triggering event, the Company quantitatively tested the Func Foods brand name for impairment utilizing the relief from royalty method to determine its fair value. As a result of the quantitative assessment, the Company recorded an impairment charge of $2.4 million during the three months ended September 30, 2022, which is presented within selling, general and administrative expenses. At September 30, 2023, there were no further indicators of intangible asset impairment.

Revenue Recognition — The Company recognizes revenue in accordance with ASC Topic 606 Revenue from Contracts with Customers ("ASC 606"). Revenue is recognized when performance obligations under the terms of a contract with the customer are satisfied. Product sales occur once control is transferred based on the commercial terms of the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods. See Note 4. Revenue for more information.

Deferred Revenue — The Company receives payments from certain distributors in new territories as reimbursement for contract termination costs paid to the prior distributors in those territories. Amounts received pursuant to these new or amended distribution agreements entered into with certain distributors relating to the costs associated with terminating the Company’s prior distributors are accounted for as deferred revenue and recognized ratably over the anticipated life of the respective new or amended distribution agreements.

Celsius Holdings, Inc.

Notes to Consolidated Financial Statements (unaudited)

September 30, 2023

(Tabular dollars in thousands, except per share amounts)

As of September 30, 2023, the Company had approximately $178.9 million in deferred revenue, of which $169.4 million is classified as deferred revenue-non-current and $9.5 million is classified as deferred revenue-current, and as of December 31, 2022, the Company had approximately $189.5 million in deferred revenue, of which $179.8 million is classified as deferred revenue-non-current and $9.7 million is classified as deferred revenue-current in the consolidated balance sheets and are contract liabilities related to Pepsi which are recognized ratably over the twenty-year agreement with Pepsi. Refer to Note 13. Related Party Transactions for more information.

Accrued Distributor Termination Fees — Termination charges related to certain of the Company’s prior distributors are included in selling, general and administrative expenses upon termination. The Company recognized distributor termination expenses of approximately $193.8 million for the year ended December 31, 2022. The Company did not have any accrued distributor termination fees as of September 30, 2023. Refer to Note 13. Related Party Transactions for more information.

Customer Advances — From time to time the Company requires deposits in advance of delivery of products and/or production runs. Such amounts are initially recorded as customer advances liability within deferred revenue. The Company recognizes such revenue as it is earned in accordance with revenue recognition policies. The Company had no customer advances as of September 30, 2023 or December 31, 2022.

Advertising Costs — Advertising costs are expensed as incurred and charged to selling, general and administrative expenses. The Company mainly uses radio, local sampling events, sponsorships, endorsements, and digital advertising, including social media. The Company incurred marketing and advertising expenses of approximately $46.7 million and $25.8 million for the three months ended September 30, 2023 and 2022, respectively. For the nine months ended September 30, 2023 and 2022, the Company incurred marketing and advertising expenses of approximately $114.2 million and $55.0 million, respectively.

Research and Development — Research and development costs are charged to selling, general and administrative expenses as incurred and consist primarily of consulting fees, raw material usage and test production of beverages. The Company incurred expenses of approximately $0.5 million and $0.1 million, for the three months ended September 30, 2023 and 2022, respectively. For the nine months ended September 30, 2023 and 2022, the Company incurred research and development expenses of approximately $1.0 million and $0.3 million, respectively.

Foreign Currency Gain/Loss — Foreign subsidiaries’ functional currency is the local currency of operations and the net assets of foreign operations are translated into U.S. dollars using current exchange rates.

The foreign subsidiaries perform remeasurements of their assets and liabilities denominated in non-functional currencies on a periodic basis and the gain or losses from these adjustments related to fluctuations in foreign exchange rates versus the U.S. dollar are included in the consolidated statement of operations and comprehensive income (loss) as foreign exchange gains or losses. For the three months ended September 30, 2023 exchange loss was approximately $0.2 million versus foreign exchange loss of approximately $0.3 million for the three months ended September 30, 2022. For the nine months ended September 30, 2023, the foreign exchange loss was approximately $1.2 million versus foreign exchange loss of approximately $0.9 million for the nine months ended September 30, 2022.

Translation gains and losses that arise from the translation of net assets from functional currency to the reporting currency, as well as exchange gains and losses on intercompany balances of long-term investment nature, are included in other comprehensive income (loss), net of tax. The Company incurred a foreign currency translation net loss during the three months ended September 30, 2023 of approximately $0.7 million and a net loss of approximately $2.0 million for the three months ended September 30, 2022. The Company incurred foreign currency translation net loss of approximately $0.7 million for the nine months ended September 30, 2023 and a net loss of approximately $4.8 million for the nine months ended September 30, 2022. The Company's primary operations in different countries required that it transacts in the following currencies:

China - Yuan,

Hong Kong - Hong Kong Dollar,

Norway - Krone,

Sweden - Krona,

Finland - Euro, and

United Kingdom - Pound Sterling

Fair Value of Financial Instruments — The carrying value of cash and cash equivalents, accounts receivable, accounts payable, other current liabilities, note receivable and accrued expenses approximate fair value due to their relative short-term maturity and market interest rates.

Celsius Holdings, Inc.

Notes to Consolidated Financial Statements (unaudited)

September 30, 2023

(Tabular dollars in thousands, except per share amounts)

Income Taxes — The Company accounts for income taxes pursuant to the provisions of ASC Topic 740-10, Accounting for Income Taxes ("ASC 740-10"). This approach requires, among other things, an asset and liability approach to calculating deferred income taxes, recognizing deferred tax assets and liabilities for expected future tax consequences stemming from temporary differences between asset and liability carrying amounts and their tax bases.

A valuation allowance is established to offset any net deferred tax assets for which management believes it is more-likely-than-not that the net deferred asset will not be realized.

Earnings per Share — The Company computes earnings per share in accordance with ASC Topic 260 Earnings per Share (“ASC 260”), which requires earnings per share ("EPS") for each class of stock (common stock and participating preferred stock) to be calculated using the two-class method. The two-class method is an allocation of earnings (distributed and undistributed) between the holders of common stock and a company’s participating preferred stockholders. Under the two-class method, earnings for the reporting period are allocated between common stockholders and other security holders based on their respective participation rights in undistributed earnings. See Note 3. Earnings per Share for more information.

Stock-Based Compensation — The Company follows the provisions of ASC Topic 718 Compensation — Stock Compensation and related interpretations. As such, compensation cost is measured on the date of grant at the fair value of the stock-based compensation. Such compensation amounts, if any, are amortized over the respective vesting periods of the grants.

On April 30, 2015, the Company adopted the 2015 Stock Incentive Plan (the "2015 Plan"). The 2015 Plan is intended to attract, retain and motivate highly competent individuals in various roles within the Company, as well as independent contractors providing consulting or advisory services. The 2015 Plan permits the grant of options and other stock-based awards for up to 5 million shares. In addition, there is a provision for an annual increase of 15% to the shares included under the plan. This increase occurs on the first day of each calendar year as a way to account for the Company's growth strategies. See Note 18. Stock-Based Compensation for more information.

Cost of Revenue — Cost of Revenue consists of the cost of concentrates and or liquid bases, the costs of raw materials utilized in the manufacturing of products, co-packing fees, repacking fees, in-bound & out-bound freight charges, as well as certain internal transfer costs, warehouse expenses incurred prior to the manufacturing of the Company’s finished products, inventory allowance for excess and obsolete products, and certain quality control costs. Raw materials account for the largest portion of the cost of revenue. Raw materials include cans, bottles, other containers, flavors, ingredients, and packaging materials.

Operating Expenses — Operating expenses include selling expenses such as warehousing expenses after manufacturing, as well as expenses for advertising, samplings and in-store demonstrations, costs for merchandise displays, point-of-sale materials and premium items, sponsorship expenses, other marketing expenses and design expenses. Additionally, operating expenses include costs such as payroll costs, travel costs, professional service fees (including legal fees), depreciation and other general and administrative costs. These expenses are included in selling, general and administrative expenses.

Shipping and Handling Costs — Shipping and handling costs for freight expense on goods shipped are included in cost of revenue. Freight expense on goods shipped for the three months ended September 30, 2023 and 2022 was approximately $16.1 million and $14.6 million, respectively. Freight expense on goods shipped for the nine months ended September 30, 2023 and 2022 was approximately $45.2 million and $26.3 million, respectively. These expenses are included in selling, general and administrative expenses.

Recent Accounting Pronouncements

The Company adopts all applicable, new accounting pronouncements as of the specified effective dates.

Effective January 1, 2023, the Company adopted ASU 2016-13 Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("CECL"), using a modified retrospective approach. ASU 2016-13 replaces the incurred loss impairment model with an expected credit loss impairment model for financial instruments, including trade receivables. The guidance requires entities to consider forward-looking information to estimate expected credit losses, resulting in earlier recognition of losses for receivables that are current or not yet due. Upon adoption of the ASU on January 1, 2023, the cumulative effect was recorded directly to accumulated deficit. The amounts recorded were not material.

Celsius Holdings, Inc.

Notes to Consolidated Financial Statements (unaudited)

September 30, 2023

(Tabular dollars in thousands, except per share amounts)

3.EARNINGS PER SHARE

Basic earnings per common share is computed by dividing income or loss attributable to common stockholders by the weighted average number of shares of basic common stock outstanding. The Company’s Series A Convertible Preferred Stock is classified as a participating security in accordance with ASC 260. Net income allocated to the holders of Series A Convertible Preferred Stock is based on the Series A stockholders’ proportionate share of weighted average shares of common stock outstanding on an if-converted basis.

For purposes of determining diluted earnings per common share, basic earnings per common share was adjusted to include the effect of potential dilutive common shares outstanding. These potential dilutive shares include unvested restricted stock and performance-based stock units. The more dilutive of the two-class method or the treasury stock method is used for this adjustment. Additionally, Series A Convertible Preferred Stock is included using the if-converted method.

Under the two-class method, net income is reallocated to common stock, the Series A Convertible Preferred Stock, and all dilutive securities based on the contractual participating rights of the respective securities to share in the current earnings as if all of the earnings for the period had been distributed.


	For The Three Months Ended September 30,				For The Nine Months Ended September 30,
	2023		2022		2023		2022
Numerator:
Net income (loss)	$	83,949	$	(181,896)	$	176,685	$	(166,059)
Less: dividends paid to Series A convertible preferred stockholders	(6,875)		(4,596)		(20,512)		(4,596)
Undistributed income (loss)	77,074		(186,492)		156,173		(170,655)
Income allocated to participating preferred shares	(6,540)		—		(13,263)		—
Net income (loss) attributable to common stockholders	$	70,534	$	(186,492)	$	142,910	$	(170,655)

Denominator:
Weighted average basic common shares outstanding	77,002		75,796		76,841		75,625
Dilutive effect of common shares	2,089		—		2,121		—
Weighted average diluted common shares outstanding	79,091		75,796		78,962		75,625

Earnings per share:
Basic	$	0.92	$	(2.46)	$	1.86	$	(2.26)
Dilutive	$	0.89	$	(2.46)	$	1.81	$	(2.26)

For both the three and nine months ended September 30, 2023, 7.3 million potentially dilutive securities were excluded from the computation of diluted earnings per share related to common stockholders, as their effect was antidilutive.

4.REVENUE

The Company recognizes revenue in accordance with ASC 606. Revenue is recognized when performance obligations under the terms of a contract with the customer are satisfied. Product sales occur once control is transferred based on the commercial terms. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods. Product sales are recorded net of variable consideration, such as provisions for returns, discounts and promotional allowances. Such provisions are calculated using historical averages and adjusted for any expected changes due to current business conditions. Consideration given to customers for cooperative advertising is recognized as a reduction of revenue except to the extent that there is a distinct good or service, in which case the expense is classified as selling or marketing expense. The amount of consideration the Company receives and revenue the Company recognizes varies with changes in customer incentives that the Company offers to its customers and their customers. Additionally, for any agreements which are one year or less, the practical expedient under ASC 340-40-25-4 is applied to expense contract acquisition costs when incurred if the amortization period of the contract asset would have otherwise been recognized in one year or less.

Celsius Holdings, Inc.

Notes to Consolidated Financial Statements (unaudited)

September 30, 2023

(Tabular dollars in thousands, except per share amounts)

Promotional (Billback) Allowance

The Company’s billback allowance programs with its distributors or retailers are executed through separate agreements in the ordinary course of business. These agreements generally provide for one or more of the arrangements described below and are of varying durations, typically ranging from one week to one year. The Company’s billbacks are calculated based on various programs with distributors and retail customers, and accruals are established for the Company’s anticipated liabilities. These accruals are based on agreed upon terms as well as the Company’s historical experience with similar programs and require management’s judgment with respect to estimating consumer participation and/or distributor and retail customer performance levels. Differences between such estimated expenses and actual expenses for promotional and other allowance are recognized in earnings in the period such differences are determined.

Billbacks (variable consideration) recorded as a reduction to net sales primarily include consideration given to the Company’s distributors or retail customers including, but not limited to the following:

•discounts granted off list prices to support price promotions to end-consumers by retailers;

•reimbursements given to the Company’s distributors for agreed portions of their promotional spend with retailers, including slotting, shelf space allowances and other fees for both new and existing products;

•the Company’s agreed share of fees given to distributors and/or directly to retailers for advertising, in-store marketing and promotional activities;

•the Company’s agreed share of slotting, shelf space allowances and other fees given directly to retailers, club stores and/or wholesalers;

•incentives given to the Company’s distributors and/or retailers for achieving or exceeding certain predetermined volume goals;

•discounted products;

•contractual fees given to the Company’s distributors related to sales made directly by the Company to certain customers that fall within the distributors’ sales territories; and

•contractual fees given to distributors for items sold below defined pricing targets.

For the three months ended September 30, 2023 and 2022, promotional allowance included as a reduction of revenue were $88.6 million and $43.9 million, respectively. For the nine months ended September 30, 2023 and 2022, promotional allowance included as a reduction of revenue were $240.6 million and $117.2 million, respectively.

Accrued promotional allowances were $136.6 million and $36.0 million as of September 30, 2023 and December 31, 2022, respectively.

Information about the Company’s net sales by geographical location for the three and nine months ended September 30, 2023 and 2022 is as follows:


	For The Three Months Ended September 30,				For The Nine Months Ended September 30,
	2023		2022		2023		2022
North America	$	371,178	$	179,541	$	930,545	$	448,141
Europe	11,038		7,546		31,599		23,540
Asia-Pacific	1,247		964		4,111		2,857
Other	1,294		182		4,324		1,102
Net sales	$	384,757	$	188,233	$	970,579	$	475,640

All of the Company’s North America revenue is derived from the United States, which is the Company’s country of domicile.

Sweden represented the largest foreign portion of total consolidated revenue accounting for approximately $7.4 million and $5.3 million for the three months ended September 30, 2023 and 2022, respectively.

Celsius Holdings, Inc.

Notes to Consolidated Financial Statements (unaudited)

September 30, 2023

(Tabular dollars in thousands, except per share amounts)

Sweden represented the largest foreign portion of total consolidated revenue accounting for approximately $20.8 million and $16.2 million for the nine months ended September 30, 2023 and 2022, respectively.

Agreements with Pepsi

The Company executed multiple agreements with Pepsi on August 1, 2022, including a Distribution Agreement relating to the sale and distribution of certain of the Company’s beverage products in existing channels and distribution methods in the United States, excluding certain existing customer accounts, sales channels, Puerto Rico and the U.S. Virgin Islands (the “Territory”). Under the Distribution Agreement, the Company has granted Pepsi the right to sell and distribute its existing beverage products in existing channels and distribution methods and future beverage products that are added from time to time as licensed products under the Distribution Agreement (collectively, the "Products") in defined territories. The Distribution Agreement represents a master service agreement and can be cancelled by either party without cause in the nineteenth year of the term (i.e., 2041), the twenty-ninth year of the term (i.e., 2051) and each 10 year period thereafter (i.e., 2061, 2071, etc.) by providing 12 months’ written notice to the other party on August 1st of any such year. Except for a termination by the Company “with cause” or a termination by Pepsi “without cause,” the Company is required to pay Pepsi certain compensation upon a termination as specified in the Distribution Agreement.

The Company agreed to provide Pepsi a right of first offer in the event the Company intends to (i) manufacture, distribute or sell products in certain additional countries as specified in the Distribution Agreement or (ii) distribute or sell products in any future channels and distribution methods during the term of the Distribution Agreement. Additionally, pursuant to the Distribution Agreement, the Company and Pepsi agreed to use commercially reasonable efforts to negotiate and execute with Pepsi a distribution agreement reasonably consistent with the Distribution Agreement for the sale and distribution of the Products in Canada, and Pepsi agreed to meet and confer in good faith with the Company regarding the terms and conditions upon which Pepsi may be willing to sell or distribute the Products, either directly or through local sub-distributors in certain other additional countries. The Distribution Agreement includes other customary provisions, including non-competition covenants in favor of the Company, representations and warranties, indemnification provisions, insurance provisions and confidentiality provisions.

The Company and Pepsi also executed the Transition Agreement, providing for the Company’s transition of certain existing distribution rights in the Territory to Pepsi. Under the terms of the Transition Agreement, Pepsi agreed to pay the Company up to $250 million in multiple tranches to facilitate the Company’s transition of certain distribution rights to Pepsi. Amounts received from Pepsi were contractually restricted to only be used to pay termination fees due to other distributors; any excess cash received over amounts due to other distributors is to be refunded back to Pepsi.

Accounting for the Agreements Executed with Pepsi.

The Company evaluated the Securities Purchase Agreement, Transition Agreement, Distribution Agreement, and other agreements executed with Pepsi on August 1, 2022, as one combined contract because the agreements were executed on the same day, with the same counterparty, in contemplation of one another and contractual terms are defined and referenced across the agreements. These agreements are referred to collectively as the “Pepsi Arrangement”. Management concluded that the Pepsi Arrangement was partially in the scope of ASC 606 and partially in the scope of ASC 505, Equity (“ASC 505") and ASC 480, Distinguishing liabilities from equity ("ASC 480"). The Company first applied the measurement and classification criteria in ASC 505 and ASC 480 with respect to the Company’s issuance of approximately 1.5 million shares of Series A Convertible Preferred Stock, as the substance of the issuance of the Series A Convertible Preferred Stock was determined to be a financing transaction. See Note 14. Mezzanine Equity for more information.

After application of the measurement and classification principles in ASC 505, and ASC 480, the Company accounted for the residual revenue elements of the Pepsi Arrangement under ASC 606. The revenue elements of the Pepsi Arrangement consisted of (i) a $227.8 million upfront payment under the Transition agreement and (ii) a $282.5 million implicit payment made to Pepsi by Celsius, representing the excess fair value over issuance proceeds received for the Series A Convertible Preferred Stock. See Note 13 . Related Party Transactions for more information on the upfront payment and implicit payment related to the excess in fair value over issuance proceeds.

The $282.5 million excess fair value over issuance proceeds of the Series A Convertible Preferred Stock represented an implicit payment made to a customer. The Company concluded that this implicit payment met the definition of an asset and has recorded such implicit payment as a deferred other cost in the consolidated balance sheets, with a portion included as current representing current year amortization in the Company's consolidated balance sheets. The Company will amortize the asset balance as contra-revenues ratably over a twenty-year period consistent with the term of the Distribution Agreement. The Company assesses the deferred other cost asset for impairment at each reporting period.

Celsius Holdings, Inc.

Notes to Consolidated Financial Statements (unaudited)

September 30, 2023

(Tabular dollars in thousands, except per share amounts)

For product sales under the Distribution Agreement, the Company recognizes revenues when control of the underlying goods are transferred to Pepsi based on the contractual terms of noncancellable purchase orders issued by Pepsi. The Company’s customary revenue recognition policy as described above is applied with respect to billbacks.

License Agreement

In January 2019, the Company entered into a license and repayment of investment agreement with Qifeng. Under the agreement, Qifeng was granted the exclusive license rights to manufacture, market and commercialize Celsius branded products in China. The term of the agreement is 50 years, with annual royalty fees due from Qifeng after the end of each calendar year. The royalty fees are based on a percentage of Qifeng’s sales of Celsius branded products; however, the fees are fixed for the first five years of the agreement, totaling approximately $6.9 million, and then are subject to annual guaranteed minimums over the remaining term of the agreement.

Under the agreement, the Company granted Qifeng exclusive license rights and provides ongoing support in product development, brand promotion and technical expertise. The ongoing support is integral to the exclusive license rights and, as such, both of these represent a combined, single performance obligation. The transaction price consists of the guaranteed minimums and the variable royalty fees, all of which are allocated to the single performance obligation.

The Company recognizes revenue from the agreement over time because Qifeng simultaneously receives and consumes the benefits from the services. The Company uses the passage of time to measure progress towards satisfying its performance obligation because of its ongoing efforts in providing the exclusive license rights including providing continuous access, updates and support. Total revenue recognized under this agreement was approximately $0.5 million, for each of the three months ended September 30, 2023 and 2022, and approximately $1.6 million and $1.5 million, for the nine months ended September 30, 2023 and 2022, respectively, which is reflected in revenues from Asia-Pacific.

5.INVENTORIES

Inventories-net consists of the following:


	September 30, 2023		December 31, 2022
Finished goods	$	143,418	$	119,229
Raw materials	59,220		62,491
Less: Inventory reserve	(3,934)		(8,431)
Inventories-net	$	198,704	$	173,289

6.PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets totaled approximately $23.7 million and $11.3 million at September 30, 2023 and December 31, 2022, respectively, consisting mainly of prepaid advances to co-packers related to inventory production, advertising, prepaid insurance, prepaid slotting fees, value added tax payments and deposits on purchases.

7.NOTE RECEIVABLE

Note receivable, net consists of the following:


	September 30, 2023		December 31, 2022
Note receivable-current	$	3,377	$	2,979
Current period change for expected credit losses(1)	(68)		—
Note receivable-non-current	—		3,574
Total	$	3,309	$	6,553

(1) Upon adoption of CECL on January 1, 2023, the Company recorded a reserve for estimated expected credit losses associated with the note receivable.

Celsius Holdings, Inc.

Notes to Consolidated Financial Statements (unaudited)

September 30, 2023

(Tabular dollars in thousands, except per share amounts)

Effective January 1, 2019, the Company restructured its China distribution efforts by entering into two separate economic agreements as they relate to the commercialization of Celsius products (i.e., the license agreement and repayment of investment agreement with Qifeng). See Note 4. Revenue for information regarding the license agreement with Qifeng. Under a separate economic agreement, Qifeng has agreed to repay the marketing investments made by Celsius into the China market through 2018, over a five-year period. The repayment, which was formalized via a note receivable from Qifeng (the "Note"), will need to be serviced even if the licensing agreement is cancelled or terminated. The Note is denominated in Chinese Yuan.

The Note requires annual principal payments due on March 31 of each year, with the final payment scheduled for 2024. The note receivable is recorded at amortized cost. Interest income generated from the Note has been immaterial.

The Company assesses the note receivable for impairment at each reporting period. This evaluation considers the probability that the Company will collect all scheduled contractual principal and interest payments, based on historical experience of Qifeng’s ability to pay, the current economic environment, forward-looking information, and other factors. If the Note is determined to be impaired, the impairment is measured based on the present value of the expected future cash flows under the Note, discounted at the Note’s effective interest rate. At September 30, 2023 and December 31, 2022, the Note was not deemed to be impaired outside of the allowance for expected credit losses. Payment in-full was received for the amounts due on March 31, 2023.

8.LEASES

The Company’s leasing activities include operating leases for its corporate office space from a related party (see Note 13. Related Party Transactions) and other operating and finance leases of vehicles and office space for the Company’s European operations.

The future annual minimum lease payments required under the Company’s operating and finance lease liabilities as of September 30, 2023 are as follows:


Future minimum lease payments	Operating Leases		Finance Leases		Total
2023	$	221	$	39	$	260
2024	598		39		637
2025	233		66		299
2026	160		63		223
2027	—		—		—
Total future minimum lease payments	1,212		207		1,419
Less: Amount representing interest	(72)		(9)		(81)
Present value of lease liabilities	1,140		198		1,338
Less: current portion	(628)		(63)		(691)
Long-term portion	$	512	$	135	$	647

9.PROPERTY AND EQUIPMENT

Property and equipment-net consists of the following:


	Estimated Useful Life in Years	September 30, 2023		December 31, 2022
Merchandising equipment - coolers	3-7	$	18,703	$	9,885
Office equipment	3-7	1,399		1,124
Vehicles	5	4,617		1,257
Less: accumulated depreciation		(3,658)		(2,081)
Total		$	21,061	$	10,185

Celsius Holdings, Inc.

Notes to Consolidated Financial Statements (unaudited)

September 30, 2023

(Tabular dollars in thousands, except per share amounts)

Depreciation expense amounted to approximately $0.7 million and $0.4 million for the three months ended September 30, 2023 and 2022, respectively. Depreciation expense amounted to approximately $1.7 million and $1.0 million for the nine months ended September 30, 2023 and 2022, respectively.

10.GOODWILL AND INTANGIBLES

At September 30, 2023 and December 31, 2022, goodwill consisted of approximately $13.6 million and $13.7 million, respectively.

The carrying amount and accumulated amortization of intangible assets as of September 30, 2023 and December 31, 2022, respectively, were as follows:


	September 30, 2023		December 31, 2022
Definite-lived intangible assets
Customer relationships	$	13,328	$	13,418
Less: accumulated amortization	(1,999)		(1,610)
Definite-lived intangible assets, net	$	11,329	$	11,808

Indefinite-lived intangible assets
Brands	$	446	$	2,984
Less: impairment	—		(2,576)
Effect of exchange rate changes	(3)		38
Indefinite-lived intangible assets, net	$	443	$	446
Intangibles-net	$	11,772	$	12,254

Customer relationships are amortized over an estimated useful life of 25 years and brands have an indefinite life. Amortization expense for each of the three months ended September 30, 2023 and 2022 was approximately $0.1 million. Amortization expense for each of the nine months ended September 30, 2023 and 2022 was approximately $0.4 million. Amortization expense is reflected in selling, general and administrative expenses. See Note 2. Basis of Presentation and Summary of Significant Accounting Policies for more information regarding the indefinite-lived intangible asset, brands.

The following is the future estimated annualized amortization expense related to customer relationships:


2023	$	133
2024	533
2025	533
2026	533
2027	533
Thereafter	9,064
Total	$	11,329

Celsius Holdings, Inc.

Notes to Consolidated Financial Statements (unaudited)

September 30, 2023

(Tabular dollars in thousands, except per share amounts)

11.ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:


	September 30, 2023		December 31, 2022
Accounts payable	$	28,146	$	36,248
Due to Pepsi(1)	—		34,807
Accrued freight	4,110		8,532
Accrued expenses	34,777		7,425
Accrued legal	5,197		10,463
Unbilled purchases	48,858		8,672
Total	$	121,088	$	106,147

(1) See Note 13. Related Party Transactions for more information related to Pepsi amounts fully refunded.

12.OTHER CURRENT LIABILITIES

Other current liabilities consist of the following:


	September 30, 2023		December 31, 2022

VAT payable	$	322	$	198
State Beverage Container Deposit	8,504		3,388
Total	$	8,826	$	3,586

13.RELATED PARTY TRANSACTIONS

Transactions with Pepsi

As further described in Note 14. Mezzanine Equity, on August 1, 2022, the Company issued approximately 1.5 million shares non-voting Series A to Pepsi. The shares accounted for approximately 8.5% of the Company’s outstanding common stock on the date of issuance, on an as-converted method. The Purchase Agreement granted Pepsi the right to designate a nominee for election to the Company’s nine-member board of directors, provided Pepsi meets certain ownership requirements. During the year ended 2022, a Pepsi executive was nominated by Pepsi and elected to the Company’s board of directors.

Based on Pepsi’s contractual representation rights for a seat on the Company’s Board of Directors, the Company concluded that Pepsi represents a related party to the Company. The following transactions were recognized in the Company’s financial statements:

•Net sales to Pepsi amounted to $248.6 million and $590.0 million, respectively, for the three and nine months ended September 30, 2023 and $58.8 million for each of the three and nine months ended September 30, 2022, and are included in revenue.

•Estimated accrued promotional allowance related to Pepsi was $82.5 million and $13.9 million at September 30, 2023 and December 31, 2022, respectively, and is included in accrued promotional allowance in the Company's consolidated balance sheets.

•During the three and nine months ended September 30, 2023, the Company purchased company-branded coolers from Grayhawk Leasing, LLC ("Grayhawk"), a wholly-owned subsidiary of Pepsi, amounting to $3.3 million and $7.5 million, respectively. The Company did not transact with Grayhawk during the three and nine months ended September 30, 2022.

•Accounts receivable due from Pepsi on September 30, 2023 and December 31, 2022, were $160.9 million and $31.6 million, respectively, and are included in accounts receivable, net on the Company’s consolidated balance sheets.

Celsius Holdings, Inc.

Notes to Consolidated Financial Statements (unaudited)

September 30, 2023

(Tabular dollars in thousands, except per share amounts)

•Pepsi paid the Company $227.8 million in cash under the Transition Agreement during the year ended December 31, 2022. This amount was used for settling termination fees with former distributors; any excess cash was contractually restricted and due back to Pepsi. As of September 30, 2023, the Company recorded deferred revenues (a contract liability) of $178.9 million, net of the $2.4 million and $7.1 million, for the three and nine months ended September 30, 2023, respectively, in the consolidated statements of operations. As of December 31, 2022, the Company recorded deferred revenues of $189.5 million, net of $4.2 million of revenue recognized. The deferred revenues will be recognized by Celsius ratably over the twenty-year agreement term.

•Amounts due to Pepsi of $34.8 million as of December 31, 2022, representing refund liabilities owed to Pepsi under the Transition Agreement, were recorded to accounts payable and accrued expenses on the accompanying consolidated balance sheets. As of September 30, 2023, payments due to Pepsi had been fully refunded, and the Company did not have a refund liability.

•The Company issued Series A Convertible Preferred Stock with a fair value of $832.5 million for an issuance price of $550 million on August 1, 2022. The excess of the fair value over the issuance proceeds, amounting to $282.5 million, has been recorded as deferred other costs in the accompanying consolidated balance sheets. See Note 14. Mezzanine Equity for more information. As of September 30, 2023 unamortized deferred other costs of $14.1 million and $251.9 million, were recorded in deferred other costs-current and deferred other costs-non-current, respectively in the consolidated balance sheets. As of December 31, 2022 unamortized deferred other costs of $14.1 million and $262.5 million were recorded as deferred other costs-current and deferred other costs-non-current, respectively in the consolidated balance sheets. Amortization of deferred other costs for the three and nine months ended September 30, 2023, was $3.5 million and $10.6 million, respectively. This was recorded as an offset to revenue.

See Notes 1. Organization and Description of Business, 2. Basis of Presentation and Summary of Significant Accounting Policies, 4. Revenue, 11. Accounts Payable and Accrued Expenses, and 14. Mezzanine Equity for more information.

Related Party Lease

The Company’s office is leased from a company affiliated with CD Financial, LLC. The lease extends until December 2024 with a monthly rent of $35 thousand.

Additionally, on May 17, 2023, the Company and CD Financial, LLC entered into an amendment to the lease that expanded the leased space, effective on July 1, 2023. The expansion space extends until December 2024 with a monthly rent of $8 thousand.

14.MEZZANINE EQUITY

Series A Convertible Preferred Stock

As of September 30, 2023 and December 31, 2022, the Company had designated and authorized approximately 1.5 million shares of Series A Convertible Preferred Stock with a par value of $0.001 per share and a stated value of $375 per share. The stated value per share may be increased from time to time in the event dividends on the Series A are paid-in-kind (“PIK Dividends”) pursuant to the Series A Certification of Designation (the “Series A Certificate”). On August 1, 2022, pursuant to the Purchase Agreement, the Company issued all of the authorized shares of Series A, to Pepsi for $550 million, excluding issuance costs. This issuance of the Series A was executed in accordance with the Distribution Agreement and the Transition Agreement. The Company determined that the fair value of the Series A on the issuance date was $832.5 million, or approximately $568 per share. The Series A Convertible Preferred Stock was recorded at fair value, net of issuance costs of $8.0 million, in the Company’s consolidated balance sheets.

Mezzanine Classification

The Series A Convertible Preferred Stock is redeemable in the event of a change in control as defined in the Series A Certificate. According to the SEC's Accounting Series Release No. 268 ("ASR 268"), preferred securities must be classified outside of permanent equity if they are redeemable for cash or other assets. This includes redemption (i) at a fixed or determinable price on a fixed or determinable date, (ii) at the option of the holder, or (iii) due to an event not solely controlled by the issuer.

Celsius Holdings, Inc.

Notes to Consolidated Financial Statements (unaudited)

September 30, 2023

(Tabular dollars in thousands, except per share amounts)

The Series A is not considered mandatorily redeemable because its redemption is contingent upon a change in control, an event not solely controlled by the Company. In compliance with ASR 268, the Company classified the Series A as mezzanine equity in the consolidated balance sheets and statements of changes in stockholders' equity for the periods ended September 30, 2023 and December 31, 2022, respectively.

Pursuant to the Purchase Agreement, Pepsi, together with its affiliates, have certain rights and restrictions with respect to their percentage ownership of the Company’s outstanding common shares on an as-converted basis, which includes both open-market purchases and the accumulation of PIK Dividends. Additionally, the Purchase Agreement grants Pepsi the right to designate one nominee for election to the Company’s board of directors, so long as Pepsi (together with its affiliates) beneficially owns at least approximately 3.7 million shares of the Company’s outstanding common stock on an as-converted basis. In August 2022, the Company expanded the number of seats from eight to nine in connection with the election of a Pepsi representative to the Company’s board of directors.

Liquidation Preference

The Series A ranks, with respect to distribution rights and rights on liquidation, winding-up and dissolution, (i) senior and in priority of payment to the Company’s common stock, (ii) on parity with any class or series of capital stock of the Company expressly designated as ranking on parity with the Series A, and (iii) junior to any class or series of capital stock of the Company expressly designated as ranking senior to the Series A. The aggregate liquidation preference of the Series A was $550 million as of both September 30, 2023 and December 31, 2022.

Voting

The Series A confers no voting rights, except as otherwise required by applicable law, and with respect to matters that adversely change the powers, preferences, privileges, rights or restrictions given to the Series A or provided for its benefit, or would result in securities that would be senior to or pari passu with the Series A. As described above, Pepsi has a contractual right to representation on the Company’s Board of Directors, subject to certain shareholding thresholds.

Dividends

The Series A entitles the holder to cumulative dividends, which are payable quarterly in arrears either in cash, in-kind, or a combination thereof, at the Company’s election (“Regular Dividends”). Regular Dividends accrue on each share of Series A at the rate of 5.00% per annum, subject to adjustment as set forth in the Series A Certificate. In addition to such quarterly Regular Dividends, shares of Series A also entitle the holder to participate in any dividends paid on the Company’s common stock on an as-converted basis. The Company declared and paid $6.9 million and $20.5 million in Regular Dividends on the Series A, which amounted to $4.69 and $13.98 per share of Series A for the three and nine months ended September 30, 2023, respectively. There were no cumulative undeclared dividends on the Series A at September 30, 2023. In addition, there were no dividends issued to common shareholders for either the nine months ended September 30, 2023 or 2022.

Redemption

Pursuant to certain conditions set forth in the Series A Certificate, Series A may be redeemed at a price per share of Series A equal to the sum of (i) the stated value of such share of Series A as of the applicable redemption date, plus (ii) without duplication, all accrued and unpaid dividends previously added to the stated value of such share of Series A, and all accrued and unpaid dividends per share of Series A through such redemption date (the “Redemption Price”).

Company’s Optional Redemption

At any time from and after the earlier of (i) August 1, 2029, if the ten-day volume weighted average price of the Company’s common stock (the “Ten-Day VWAP”) does not exceed the conversion price on the date immediately prior to the date the Company delivers a redemption notice to the holders, and (ii) the cancellation of the Distribution Agreement by the Company, the Company has the right to redeem all (and not less than all) of the then-outstanding shares of Series A at the Redemption Price. In the event of the Company's optional redemption, the Company shall affect such redemption by paying the entire Redemption Price on or before the date that is thirty days after the delivery of the Company’s redemption notice and by redeeming all the shares of Series A on such date.

Celsius Holdings, Inc.

Notes to Consolidated Financial Statements (unaudited)

September 30, 2023

(Tabular dollars in thousands, except per share amounts)

Change in Control Redemption

In the event of a change in control, as defined by the following scenarios, the Company (or its successor) shall redeem all (and not less than all) of the then-issued and outstanding shares of Series A: (i) a sale or transfer, directly or indirectly, of all or substantially all of the assets of the Company in any transaction or series of related transactions (other than sales in the ordinary course of business); (ii) any merger, consolidation or reorganization of the Company with or into any other entity or entities as a result of which the holders of the Company’s outstanding capital stock (on a fully-diluted basis) immediately prior to the merger, consolidation or reorganization no longer represent at least a majority of the voting power of the surviving or resulting Company or other entity; or (iii) any sale or series of sales, directly or indirectly, beneficially or of record, of shares of the Company’s capital stock by the holders thereof which results in any person or group of affiliated persons owning capital stock holding more than 50% of the Company's voting power.

Upon a change in control and redemption, each Series A holder will receive, an amount equal to the greater of (A) the Redemption Price in cash, and (B) the cash and/or other assets (including securities) such holder would have received if each share of Series A were converted into a number of shares of common stock equal to the then-applicable conversion ratio and participated in such transaction resulting in such change of control as of the close of business on the business day immediately prior to the effective date of such transaction.

If the Company or its successor shall not have sufficient funds legally available under the Nevada law governing distributions to stockholders to redeem all outstanding shares of Series A, then the Company shall (A) redeem, pro rata among the holders, a number of shares of Series A equal to the number of shares of Series A that can be redeemed with the maximum amount legally available for the redemption, and (B) redeem all remaining shares of Series A not redeemed because of the foregoing limitations at the applicable change of control redemption price as soon as practicable after the Company (or its successor) is able to make such redemption out of assets legally available for the purchase of such shares of Series A. The inability of the Company (or its successor) to make a redemption payment for any reason shall not relieve the Company (or its successor) from its obligation to affect any required redemption when, as and if permitted by applicable law.

Holder Right to Request Redemption

On each of August 1, 2029, August 1, 2032, and August 1, 2035, the majority holders of the Series A have the right, upon no less than six months prior written notice to the Company, to request that the Company redeem all (and not less than all) of the then-outstanding shares of Series A, at the Redemption Price.

In the event of a holder-optional redemption, the Redemption Price will be payable, and the Company shall redeem the shares in three equal installments. These installments would commence on August 1, 2029, August 1, 2032, or August 1, 2035, as applicable, and in each case on the fifteenth- and thirtieth-month anniversary thereafter. On each redemption date for a holder-optional redemption, the Company will redeem shares of Series A on a pro rata basis according to the number of shares owned by each holder. The number of outstanding shares will be determined by dividing (i) the total number of Series A shares outstanding immediately prior to such redemption date by (ii) the number of remaining redemption dates (including the redemption date to which such calculation applies).

If, on any redemption date, legal constraints under the Nevada law governing distributions to stockholders or the terms of any indebtedness of the Company to financial institutions prevents the Company from redeeming all shares of Series A, the Company will ratably redeem the maximum number of shares that it may legally redeem, and will redeem the remaining shares as soon as it may lawfully do so.

Should any shares of Series A scheduled for redemption on a redemption date remain unredeemed for any reason on such redemption date, the following will occur: from the redemption date to the fifteen-month anniversary of such redemption date, the dividend rate with respect to such unredeemed share will automatically increase to 8% per annum. From such fifteenth-month anniversary to the thirtieth-month anniversary of such redemption date, the dividend rate with respect to such unredeemed share will automatically increase to 10% per annum. After such thirtieth-month anniversary of such redemption date, the dividend rate with respect to any such unredeemed share will automatically increase to 12% per annum, in each case until such share is duly redeemed or converted.

Conversion

The shares of Series A may be converted into shares of the Company’s common stock pursuant to the Series A Certificate either at the option of the Company or subject to an automatic conversion as discussed below. The Series A was issued with a conversion price of $75 which is potentially subject to adjustment pursuant to the Series A Certificate. The conversion ratio is

Celsius Holdings, Inc.

Notes to Consolidated Financial Statements (unaudited)

September 30, 2023

(Tabular dollars in thousands, except per share amounts)

calculated as the quotient of (a) the sum of (x) the stated value of such share of Series A as of the applicable conversion date, plus (y) all accrued and unpaid dividends previously added to the stated value of such share of Series A, and without duplication, all accrued and unpaid dividends per share of Series A through the applicable conversion date; divided by (b) the conversion price as of the conversion date. As of September 30, 2023, the conversion ratio of the Series A into common was 1 to 5. At September 30, 2023, approximately 7.3 million shares of the Company’s common stock are issuable upon conversion of the Series A Convertible Preferred Stock.

As of September 30, 2023, the Series A was not probable of becoming redeemable, as the most likely method of settlement is through conversion which is likely to occur before the holder's right to request redemption becomes exercisable.

Company Optional Conversion

At any time from and after August 1, 2029, provided the Ten-Day VWAP immediately prior to the date the Company delivers a conversion notice to the holders of Series A exceeds the Conversion Price, the Company may elect to convert all, but not less than all, of the outstanding shares of Series A into shares of the Company’s common stock.

Automatic Conversion

The Series A will convert automatically into shares of the Company’s common stock upon the occurrence of any of the following, each an “Automatic Conversion Event”:

•Any date from and after the valid termination of the Distribution Agreement by the Company or Pepsi, if the Ten-Day VWAP immediately preceding such date exceeds the Conversion Price of such share as of such date.

•Any date from and after August 1, 2028, on which (x) the Company’s products meet a market share requirement during a specified period (as defined in the Distribution Agreement) and (y) the Ten-Day VWAP immediately prior to such date exceeds the conversion price of such share as of such date. In the case of an Automatic Conversion Event, each share of Series A then outstanding shall be converted into the number of shares of common stock equal to the conversion ratio of such share in effect as of the automatic conversion date. The occurrence of an Automatic Conversion Event will terminate any right of the holder to receive a redemption at their request even if such request has already been submitted, provided that the Series A shares have not already been redeemed.

Other Accounting Matters

The Company has adopted Accounting Standards Update 2020-06 (“ASU 2020-06”), effective January 1, 2022. The provisions of ASU 2020-06 prohibit the recognition of a beneficial conversion feature on preferred shares issued after the adoption of the ASU. The Company adopted ASU 2020-06 for the Series A for the year ended December 31, 2022.

FASB ASC 815 generally requires an analysis of embedded terms and features that have characteristics of derivatives to be evaluated for bifurcation and separate accounting in instances where their economic risks and characteristics are not clearly and closely related to the risks of the host contract. The Company performed an evaluation and determined the Series A and the host instrument is more akin to equity. The Company identified certain embedded redemption and conversion features which it evaluated for bifurcation and determined no bifurcation of these embedded or conversion features was required.

15.STOCKHOLDERS’ EQUITY

Issuance of common stock pursuant to exercise of stock options and other awards

During the nine months ended September 30, 2023, the Company issued an aggregate of 0.8 million shares of its common stock under the 2015 Plan. The Company received aggregate proceeds of approximately $1.6 million for 0.5 million options exercised for cash, with the remaining balance of the options having been exercised on a “cashless” basis.

During the nine months ended September 30, 2022, the Company issued an aggregate of 1.3 million shares of its common stock under the 2015 Plan. The Company received aggregate proceeds of approximately $3.1 million for 0.9 million options exercised for cash, with the remaining balance of the options having been exercised on a “cashless” basis.

Celsius Holdings, Inc.

Notes to Consolidated Financial Statements (unaudited)

September 30, 2023

(Tabular dollars in thousands, except per share amounts)

16.FAIR VALUE MEASUREMENTS

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:


Level 1:			Observable inputs such as quoted market prices in active markets for identical assets or liabilities.

Level 2:			Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3:			Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.

The Company engaged a third-party valuation firm to assist in determining the fair value of the approximately 1.5 million shares of Series A Convertible Preferred Stock issued on August 1, 2022. The Series A Convertible Preferred Stock is classified in mezzanine equity, see Note 14. Mezzanine Equity for more information. The valuation of the Series A Convertible Preferred Stock represents a non-recurring fair value measurement. The Company used a Monte Carlo simulation model to determine the fair value of the Series A Convertible Preferred Stock on August 1, 2022. The Monte Carlo simulation utilized multiple level 2 input variables to determine the value of the Series A Convertible Preferred Stock including a volatility rate of 45%, risk free interest rate of 2.69%, 5.0% dividend rate, the closing price of the Company’s common stock on the issuance date of $98.87, a debt discount rate of 12.5% and a discount for lack of marketability attributed to the registration period of the underlying stock. The selected historical volatility was based on Celsius and a certain peer group. The risk-free interest rate was based on the U.S. STRIPS Rate with a corresponding term as of issuance date. The 5.0% dividend rate is consistent with the provisions of the Series A Convertible Preferred Stock and with the Company’s past payments or such dividends made in cash. The debt discount rate was based on estimated credit analysis and corresponding market yields as of the issuance date. The Company applied a nominal discount for lack of marketability with respect to the assumed registration period of the underlying shares.

17.INCOME TAXES

In general, the Company uses an estimated annual effective tax rate, which is based on expected annual income and statutory tax rates in the various jurisdictions in which the Company operates, to determine its quarterly provision for income taxes. Certain significant or unusual items are separately recognized in the quarter in which they occur and can be a source of variability on the effective tax rates from quarter to quarter. The Company’s effective tax rate may change from period to period based on recurring and non-recurring factors including the geographical mix of earnings, enacted tax legislation, and state and local income taxes.

The effective income tax rate for the three months ended September 30, 2023 was 19.9% and differed from the statutory federal income tax rate of 21.0% primarily due to net benefits on stock-based compensation awards, disallowed stock-based compensation expense and state income taxes.

The effective income tax rate for the nine months ended September 30, 2023 was 21.1% and differed from the statutory federal income tax rate of 21.0% primarily due to windfall benefits on stock-based compensation awards, disallowed stock-based compensation expense and state income taxes.

The effective income tax rate for the three and nine months ended September 30, 2022, was (24.2%) and (33.5%), respectively. Both rates differed from the statutory federal income tax rate of 21.0% primarily due to the tax impact of the $282.5 million Series A Convertible Preferred Stock fair value adjustment. This adjustment is recorded as Deferred Other Costs in the consolidated balance sheets and will be amortized over twenty years for book purposes. As this expense is non-deductible for tax purposes, the Company recorded a $71.4 million deferred tax liability in the third quarter of 2022 as a discrete item of deferred tax expense. Additional factors impacting the effective income tax rates included disallowed stock-based compensation expense and state and local income taxes. For the nine-month period, the rate was further affected by the release of certain state income tax reserves. The Company is subject to U.S. federal income tax as well as income tax in multiple state and foreign jurisdictions.

The Company’s tax returns for tax years 2020 through 2022 remain subject to potential examination by the taxing authorities.

Celsius Holdings, Inc.

Notes to Consolidated Financial Statements (unaudited)

September 30, 2023

(Tabular dollars in thousands, except per share amounts)

18.STOCK-BASED COMPENSATION

The Company adopted the 2006 Incentive Stock Plan on January 18, 2007. This plan was intended to provide incentives to attract and retain highly competent persons at all levels as employees of the Company, as well as independent contractors providing consulting or advisory services to the Company, by providing them opportunities to acquire the Company’s common stock. While the plan terminated 10 years after the adoption date, certain awards issued under such plan have not yet been terminated. The Company is no longer granting awards under this plan and there are no unvested awards as of September 30, 2023.

The Company adopted the 2015 Plan on April 30, 2015. The 2015 Plan is intended to provide incentives which will attract and retain highly competent persons at all levels as employees of the Company, as well as independent contractors providing consulting or advisory services to the Company, by providing them opportunities to acquire the Company’s common stock or to receive monetary payments based on the value of such shares pursuant to awards issued. The 2015 Plan permits the grant of options and shares for up to 5 million shares. In addition, there is a provision in the 2015 Plan for an annual increase to the maximum number of shares authorized under the 2015 Plan. The increase shall be added on the first day of the calendar year beginning January 1, 2016, equal to 15% of the number of shares outstanding as of such date. As of September 30, 2023, approximately 5.9 million shares were available for issuance under the 2015 Plan. See Note 15 Stockholders' Equity for more information.

For the three months ended September 30, 2023 and 2022, the Company recognized stock-based compensation expense of approximately $5.0 million and $6.3 million, respectively. For the nine months ended September 30, 2023 and 2022, the Company recognized stock-based compensation expense of approximately $16.2 million and $14.8 million, respectively. Stock-based compensation expense is included in selling, general and administrative expense.

Stock Options

The Company used straight-line amortization of compensation expense over the two to three-year requisite service or vesting period of the grant. The maximum contractual term of the Company's stock options is 10 years. The Company recognizes forfeitures as they occur. There were options to purchase approximately 1.6 million and 1.9 million shares that have vested as of September 30, 2023 and December 31, 2022, respectively. No stock options were issued for the nine months ended September 30, 2023 and the year ended December 31, 2022.

The Company uses the Black-Scholes option-pricing model to estimate the fair value of its stock option awards and warrant issuances and recognizes forfeitures as they occur.

A summary of the status of the Company’s outstanding stock options as of September 30, 2023 and changes during the nine months ending on that date is as follows:


		Weighted Average			Aggregate Intrinsic Value (000’s)		Weighted Average Remaining Term (Yrs)
	Shares (000’s)	Exercise Price		Grant Date Fair Value
At December 31, 2022	2,266	$	9.66		$	213,914	5.43

Exercised	(585)	4.72		138.76	78,598
Forfeiture and cancelled	(16)	24.49
At September 30, 2023	1,665	$	11.44		$	266,770	4.73
Exercisable at September 30, 2023	1,560	$	9.40		$	253,031	4.56

Celsius Holdings, Inc.

Notes to Consolidated Financial Statements (unaudited)

September 30, 2023

(Tabular dollars in thousands, except per share amounts)

The following table summarizes information about employee stock options outstanding at September 30, 2023:


	Outstanding Options				Vested Options
Range of Exercise Price	Number Outstanding at September 30, 2023 (000's)	Weighted Average Remaining Life	Weighted Average Exercise Price		Number Exercisable at September 30, 2023 (000's)	Weighted Average Exercise Price		Weighted Average Remaining Life
$1.05 - $1.97	15	1.69	$	1.36	15	$	1.36	1.69
$3.23 - $4.85	1,118	4.04	3.89		1,118	3.89		4.04
$5.59 - $8.39	185	4.47	5.79		185	5.79		4.47
$14.53 - $21.80	35	6.84	14.53		35	14.53		6.84
$21.8 - $32.70	13	7.08	21.80		7	21.80		7.08
$42.64 - $63.96	299	7.26	42.67		200	42.67		7.26
Outstanding options	1,665	4.73	$	11.44	1,560	$	9.40	4.56

As of September 30, 2023, the Company had approximately $0.8 million, of unrecognized pre-tax non-cash compensation expense related to options to purchase shares, which the Company expects to recognize, based on a weighted-average period of 0.3 years.

Restricted Stock Units

Restricted stock units are awards that give the holder the right to receive one share of common stock for each restricted stock unit upon meeting service-based vesting conditions (typically annual vesting in three equal annual installments, with a requirement that the holder remains in the continuous employment of the Company). The Company determines the fair value of restricted stock-based awards based on the market price of the common stock on the date of grant. The holders of unvested units do not have the same rights as stockholders and do not have the right to receive any dividends or right to vote. The value of restricted stock units that vest over time is established by the market price or the date of its grant. A summary of the Company’s restricted stock unit activity for the nine months ended September 30, 2023 and 2022 is presented in the following table:


	Nine Months Ended
	September 30, 2023			September 30, 2022
	Shares (000's)	Weighted Average Grant Date Fair Value		Shares (000's)	Weighted Average Grant Date Fair Value
Unvested at beginning of period	539	$	60.73	566	$	52.66

Granted	144	105.42		207	81.74
Vested	(206)	58.50		(183)	56.33
Forfeited and cancelled	(64)	72.66		(47)	64.37
Unvested at end of period	413	$	94.26	543	$	63.93

The total fair value of shares vested during the nine months ended September 30, 2023 and 2022 was approximately $22.1 million and $9.7 million, respectively. Unrecognized compensation expense related to outstanding restricted stock units to employees and directors as of September 30, 2023 and 2022 was $20.0 million and $29.3 million, respectively, and is expected to be expensed over the next